Real estate in the delta quadrant

World over there is a real estate boom. The sector has seen fiery demand for housing partly fueled by hedge fund dollars with returns coasting in stable double digits and showing no signs of abating. This, despite the ongoing disruptions caused by the Delta variant, while occasionally spooking financial markets, seems to have had little impact on prices.

India, so far, the worst affected by the delta variant, seems to be a mixed bag with some talking up long term prospects. In a statement, Secretary, ministry of Housing and Urban Affairs(Mohua) said the $200 billion sector is expected to grow and become a $1 trillion industry by 2030, a fivefold jump in nine years.

In the month of July, seemingly opposite view was expressed in the 29th Edition of Knight Frank-FICCI-NAREDCO Real Estate Sentiment Index Q2 2021 (April - June 2021) Survey which explained the second wave impact on market sentiment.

The real estate sentiment index score dropped from 57 in Q1 2021 to 35 in Q2 2021, even though the drop was less intense than it was during the first Covid-19 wave (Q2 2020) when the score had hit an all-time low of 22.

Whereas on the ground Mumbai saw luxury (read highly priced properties) and other transaction close at Rs 4000 crores this year.

However more than 3000 crores worth were for properties above 15 crore ticket - this lends credence to the premise this was largely driven by Maharashtra governments reduced stamp duty and registration charges.

Bangalore on the other hand saw demand dented by 25% in the last quarter prompted by the lockdowns (Prop Index April to June) while the share of 7k plus segment rose from 36% to 39% during the period.

Delhi, one of the worst affected by the virus this year witnessed a whopping 54% Q-on-Q drop in demand (Proptiger).

Post the disastrous Delta variant quarter, RE stocks saw a 17% jump in the Nifty Realty Index during this month.

The index, which tracks a basket of RE companies, saw individual firms stock price jump between 7% and 40% for the month.

All this “data” is at the very least, confusing and brings forth a few questions: Who, if anyone is right?

Is the dip or lack thereof relevant? And how should any investor look at the emerging scenario?

Notwithstanding the PR offensive, home sales crashed across the country in the last quarter while prices, theoretically, did not and MoHUA could be right about the 5x growth figure but if that were to be realised it would be on account of the base effect only – not a jump is orders.

Having said that, homes aren’t likely to become more affordable in the foreseeable future ether.

RE is a hedge against inflation and holdings normally accomplish income objectives of any financial plan.

To that extent it may be prudent to have some low cost, liquid exposure to the sector. While this excludes buying houses, REITs (even InVITs) become an attractive way to invest.

Some developments like the recently-introduced Model

Tenancy Act would make rent laws more equitable and help unlocking many housing units which could be leased out and facilitate the entry of hedge funds in the market, leading to prices firming up for new stock (it’s earlier to buy in bulk from developers than negotiating with individual investors).

This shift from physical to electronic real estate is a growing but sure trend even though advisors are yet to warm up to the idea.

For investors, it is a boon for achieving inflation and income objectives, especially with Sebi lowering barriers recently.

Whether Indians will give up their craving for house ownership, I suppose time will tell.